Question

1. Consider the following Production Possibilities Frontier. (Chapter 1)

Goods Possibilities

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   A B C D E

Capital Goods 5 4 3 2 0

Consumer Goods 0 5 9 12 14

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a. Use the information in the above table to show the production possibilities frontier (PPF) graphically. Mark the attainable and efficient, attainable but inefficient, and unattainable possibilities. Explain in words what the frontier (the curve) shows us.

b. Explain the reason its shape is “bowed out?”?” Under what conditions will the PPF be just a straight-line down sloping? Explain!

c. Of the 5 possibilities indicated in the table above (e.g., A-E) which one is more efficient and why? If the economy was currently at point “B,” what would be the “opportunity cost” of producing Four more consumer goods? One more Consumer Good?

d. How does this opportunity cost change as we make successively more Consumer Goods? And why? And how does PPF show that? Explain!

e. List 4 ways the society might be able to expand (shift) its current PPF out into the unattainable areas?

f. True/False: Unemployment exists only when we are under the PPF and there is zero unemployment when we are on the PPF? Explain your answers! 10pts.

2. Suppose you won $15 on a lotto ticket at the local 7-Eleven and decided to spend all the winnings on candy bars and bags of peanuts. The price of candy bars is $0.75 and price of peanuts is $1.50.

a. Construct a table showing all the different combinations of the two products that will cost $15.

b. Plot the data in your table as a budget line in a graph and explain what the budget line means.

c. Write down the formula showing the slope of the budget line in terms of the two prices and calculate the value of the slope?

d. What is the opportunity cost of one more candy bar? One more bag of peanuts? Do the opportunity cost change as more candy bar is purchased?

e. Suppose income doubles. How will this affect your budget line? Draw the new budget line.

Answer 1

B) The PPC is bowed out because of the following reasons-

1) When a curve is concave to the origin, it means that it has an increasing slope as we move along the curve from left to right.

2) because the PPC=Marginal opportunity cost, I creasing slope implies increasing marginal opportunity cost.

Hence, it is concluded that is concave to the origin as more and more resources are shifted from product -1 to product-2 marginal cost tends to rise.

The PPF will be a straight line only when the resources required to produce both the products is same or they are essentially the same products.

C) If the economy was at B imply to the bundle (4,5) the opportunity cost of producing 4 more consumer good would be

Change in capital goods / change in consumer goods

= 5-4/9-5

=.25 units

The opportunity cost of producing 1 more consumer good can be found out from the graph by-

=5-4.5/6-5

=.5 units

D)As we create more and more consumer goods opportunity cost will tend to RISE. This owes to the fact that as wee move from left to right on the graph the slope tends to rise which is equal to the opportunity cost.

The PPC is bowed out for this very reason hence the slope increass and the cost rises.

E) the reasons are-

1) growth of resources

2) growth of technology

3) increased savings and distribution of income